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November 2004

Special Pub. Week of November 30, 2004

THE EXPLORERS 2004: Pioneer building an Alaska drilling portfolio

Dallas independent opens permanent Alaska office, has concerns about cost of doing business on North Slope

Kay Cashman

Petroleum News

Ken Sheffield has repeatedly said Alaska is one of four key exploration hot spots for Pioneer Natural Resources. Sheffield, based in Anchorage and president of Pioneer Natural Resource’s Alaska subsidiary, said his company is looking for more drilling prospects in the state.

The Dallas-independent opened a permanent, 15-person office in the ConocoPhillips tower in downtown Anchorage in the summer of 2004.

But Sheffield has been quick to point out that his company’s interest in Alaska could change if the state of Alaska increases the tax burden on the oil and gas industry.

“We came to Alaska because it has a world-class petroleum system. … It’s a great place to find oil, but sometimes it’s not such a great place to make money,” Sheffield said in May 2004 following the adjournment of the Alaska Legislature.

Sheffield acknowledged the state has been “improving the regulatory environment in the last couple of years” since Pioneer first entered Alaska in October 2002.

Nonetheless, the North Slope is challenging for independents such as Pioneer, he said.

“It’s the most expensive basin in the world,” Sheffield said, citing the geologic risk common in any oil province, as well as Alaska’s unique situations that add to the risk, including the high cost of transporting crude oil to West Coast markets; protracted project timelines because of limited winter access; and low activity levels which reduce the number of oilfield service and supply contractors in the state and ultimately drive up costs because of a lack of competition.

The stability of the state’s fiscal policy is also a concern, Sheffield said, and could change his company’s enthusiasm for Alaska.

“I’m concerned about the talk of increasing taxes. It would be hard for us to move forward if there were any new taxes. The margins are too thin on the projects we’re looking at.”

Alaska’s competition

Alaska’s competition for Pioneer’s investment dollars — i.e. the company’s other three key exploration hotspots — are the Gulf of Mexico, particularly the deepwater Gulf, North Africa and West Africa, Sheffield said.

In Alaska, Pioneer hopes to build a “portfolio” of drilling prospects: “We’re not just looking to drill one to two wells per year,” he said, noting the company would achieve an “economy of scale” by drilling several wells each year. Sheffield said possibilities for the future include “continued step-out exploration” on the central North Slope, which “offers attractive reserve target sizes for independent companies.”

Pioneer currently has four North Slope prospects that it has either drilled or hopes to drill, including Storms, south of Prudhoe Bay where Pioneer plans to shoot 3-D seismic in the winter of 2004-2005; Gwydyr Bay, north of the ConocoPhillips-operated Kuparuk field; Caribou, which is “north of Point McIntyre on trend with (BP’s) Northstar” (unit); the new Oooguruk unit, which Pioneer successfully drilled the winter of 2002-2005 and, according to Sheffield, expects to sanction for development either in the fourth quarter of 2004 or the first quarter 2005.

Goal to achieve step change

One of Pioneer’s goals in Alaska is to “achieve a step change in the North Slope cost structure,” Sheffield said.

“In looking for big reservoirs, you’re going to find small reservoirs,” against which Pioneer is applying what he calls the “independent mindset,” which involves “challenging existing methods.”

One thing that needs to be done, Sheffield said, is to “decrease project cycle times,” from the time of the lease sale until a project is in production. He believes this can be done without jeopardizing the environment.

Leveraging existing North Slope infrastructure is another way to bring down costs — something Pioneer is looking at doing in order to bring the Oooguruk unit online.

More than one Oooguruk development scenario

The unit is offshore the North Slope, north and west of, and contiguous with, the ConocoPhillips-operated Kuparuk River unit. Due to a farm-in executed earlier this year by operator Pioneer and partner Armstrong, ConocoPhillips retains the right to participate in any Oooguruk project sanctioned by Pioneer and Armstrong. Pioneer executives have talked about possible production synergies with the Kuparuk unit’s existing facilities versus a standalone production facility.

Pioneer and Kerr-McGee have also talked about developing their two unit discoveries together. Kerr-McGee’s Nikaitchuq unit and Pioneer’s are located within 46,000 acres of state leases pulled together by Armstrong in the shallow waters of Harrison Bay. The acreage forms an arc over the top of the producing Kuparuk River and Milne Point units.

Armstrong enlisted Pioneer and Kerr-McGee as majority owners and operators of exploration units situated on either side of its leasehold. Armstrong first brought in Pioneer as a 70 percent partner at Oooguruk, the unit on the westerly side of the acreage. A discovery was announced there after the companies drilled three wells in the winter of 2002-03.

Armstrong then brought in Kerr-McGee as a 70 percent partner in the Nikaitchuq unit on the east side, where a discovery was announced after drilling two wells in the winter of 2003-04. Separately, Armstrong applied for the Tuvaaq exploration unit on 14,560 acres between Oooguruk and Nikaitchuq, where Kerr-McGee will drill at least one exploration well in the winter of 2004-05.





Pioneer drops Evergreen’s shallow gas leases in Alaska; retains 48,000 acres of conventional oil, gas leases

—abbreviated version of an Oct. 3, 2004 article from Petroleum News

Independent Pioneer Natural Resources said Sept. 30, 2004 that it was releasing all existing shallow gas leases in Alaska’s “Matanuska-Susitna Valley acquired as part of its merger with Evergreen Resources.”

Alaska Gov. Frank Murkowski said the relinquishment was a result of the merger, and of negotiations with the state, noting that the shallow gas leasing program, which has been abolished by the Legislature, was a program that his administration inherited.

The released leases cover approximately 235,500 acres and include farm-outs and a Mental Health Trust lease.

Pioneer said in statement that it decided to relinquish the non-conventional leases and withdraw an Evergreen exploration license application for 30,000 acres as a part of its strategic planning and due diligence associated with the merger.

Pioneer also said it “believes regulatory certainty is critical to any development program” it undertakes, referring to the state of Alaska’s decision this past year to abolish its over-the-counter leasing program for shallow gas, and a changing regulatory regime for coalbed methane exploration and development.

Scott Sheffield, Pioneer’s chairman and chief executive officer said, “We strongly support the state’s new gas-only leasing program defined by HB531, and we encourage them to continue the Best Interest Finding process for the Mat-Su.”

Pioneer retained 48,000 acres of conventional Matanuska-Susitna oil and gas leases in the Pioneer unit.

Alaska Division of Oil and Gas Director Mark Myers noted that Mat-Su areas leased under the shallow gas program had “discontinuous coal seams and lack of proper kind of fracturing” for coalbed methane, but said the geology in the areas of conventional oil and gas leases in the Pioneer unit “suggest it could be commercial.”


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